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Fixing Social Security, Part 1 of 2

social security card.jpgThere has been a lot of press about "fixing" the Social Security system. Most pundits focus on the possibility of reallocating money between the retirement fund and the disability fund, something that has been done many times before. However, a recently passed law has made such a fund transfer contingent on so-called reforms, making it much less likely that reallocation will ever occur.

There is another way that has received less attention. Increasing the cap on the payroll deductions that fund the programs operated by the Social Security Administration (SSA) could go a long way toward strengthening them financially. Social Security programs are funded through the payroll tax on earnings, and that tax currently applies to the first $118,500 in wages. Those who earn more than this only pay up to the capped amount; earnings above this are not taxed.

This sounds like a lot of money, and for most of us, it is. However, close to 6 percent of working Americans make more than this amount, but are subject to payroll deductions only for the amount up to the cap. This means they are paying at a lower rate overall - sometimes much lower - than most Americans.

According to a report by the Office of Retirement and Disability Policy in 2014, the percentage of national earnings that are subject to the cap has fallen since the early 1980s. The report states that the reason for this is that earnings above the cap have increased faster than earnings among workers who make less than the cap. In short, the rich are getting richer faster than the rest of us.

There have been several proposals to change the way the Social Security tax is applied. One is to eliminate the cap altogether. This change, according to Census Bureau figures, would cause around 6 percent of the working population to pay more in taxes. Another approach is to tax the highest earners, those above $250,000. This would affect around 1.4 percent of earners nationally. Both of these approaches would fix the long-term shortfall - for at least 75 years - that is projected to happen if nothing changes.

Based on public surveys, eliminating or changing the cap on earnings appears to be the most acceptable approach. In our next blog post, we will discuss other proposals to strengthen the funding base for Social Security programs.

Sources:

http://thehill.com/blogs/congress-blog/economy-budget/204996-scrapping-the-social-security-payroll-tax-cap

http://www.bizjournals.com/bizjournals/washingtonbureau/2015/08/social-security-turns-80-are-higher-payroll-taxes.html

http://www.ssa.gov/policy/docs/policybriefs/pb2011-02.html

http://money.usnews.com/money/blogs/planning-to-retire/2014/11/14/5-potential-social-security-fixes

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